Open banking: the pros, the cons, the basics
January 2018 marked the introduction of open banking via the catchily-named “second payment services directive”. This initiative could revolutionise the way we manage our personal finances, yet most of us remain in the dark. Few people are aware of the term “open banking”, and of those who are, even fewer understand its consequences.
So what is open banking?
Open banking is a set of rules and regulations that require the big UK banks to allow their customers to share their own transaction data with third parties.
As millennials continue to adopt digital apps as a form of money management, we are seeing more and more companies emerging with innovative ideas. The idea is that sharing our data with these companies will give them a better understanding of our spending habits, increasing competition and innovation in the financial ecosystem. This in turn will lead to smarter and more advanced products to help manage our money.
Hang on, I never agreed to this!
Remember the terms & agreements sheet you skimmed through when signing up to Yolt or Moneyhub? Me neither.
It contained a clause that gave consent to the provider to access your financial information. Upon accepting, the provider sends a request (via what’s known as an API) to your bank which processes it and shares your details.
Is it safe?
In today’s day and age, everything we do is increasingly leaving a digital trace – data – which others can use and analyse. Open banking will allow financial data to be merged and analysed with other datasets. For example, firms could see what connections exist between my transactional data and my social media data.
This is in many ways beneficial, and allows new convenient and personalised services, but comes at a cost to data privacy and control. It is therefore important to understand what personal data we are sharing, who owns it and how digital companies are using it.
What type of products are available?
If you have multiple current accounts and credit cards across different banks, overseeing every account can be a hassle. To help, you can now use aggregating apps, such as Yolt, Emma, Cleo and Money Dashboard.
Apps that provide recommendations on your spending and savings will also use open banking to access your data. A couple of the most popular ones are Chip and Plum.
More recently, you can now access debt and credit management offerings through open banking. Companies like Credit Kudos offer a free service to assess an individual’s financial behaviour to work out whether they are eligible for a range of financial services and demonstrate their creditworthiness. Similarly, Trussle helps property buyers find the best home loan, and lets existing owners know when they should remortgage to find a better deal.
The bottom line
Open banking will likely continue to encourage the development of higher quality digital financial services, with product offerings becoming more and more extensive. Remember you don’t have to share your data if you don’t want to. Though doing so allows you to benefit from these innovations.